Deutsche Bank AG finalised a deal transferring its business with hedge fund clients to BNP Paribas as part of the German lender’s historic retreat from investment banking.
About 1,000 Deutsche Bank employees will move to the French rival through 2021, according to people with knowledge of the matter. Ashley Wilson, one of two executives at the German bank overseeing the disposal of unwanted assets, will head the business during this period and may eventually leave to run the combined unit at BNP, the people said, asking not to be identified as the matter is private.
The volume of assets BNP will ultimately add remains uncertain because Deutsche Bank’s client balances slumped by about half to $80bn since it announced its intention to transfer the business.
The lenders expect clients to come back now that there’s more certainty, the people said. But analysts at Citigroup Inc led by Andrew Coombs questioned whether there will be anything left to transfer by the time the deal is closed.
The two firms had agreed on the move in principle in early July, as Deutsche Bank chief executive officer Christian Sewing retreats from equities trading – which houses the prime business – in the bank’s biggest restructuring in decades.
But finalising the accord has been complicated by the client defections. For Sewing’s counterpart at BNP, Jean-Laurent Bonnafe, the deal could bring the scale needed to compete with the bigger players.
Shares of both lenders fell yesterday along with the broader market. Deutsche Bank declined 3.5% in Frankfurt, curbing gains this year to 1.3%. BNP lost 2.8% in Paris and is up 11% in 2019.
The agreement, which is subject to regulatory approval, could vault BNP into the global top 4 of prime brokerages over the next 12 months, reaching $250bn to $300bn in client balances eventually, according to the people. Deutsche Bank will continue to manage the platform until clients can be passed over, the two banks said yesterday.
“Now that the deal has signed, we believe we have the basis to regain and expand on the business,” Deutsche Bank chief operating officer Frank Kuhnke said in a telephone interview.
The deal “provides tangible real benefits for our customers and gives our staff a way forward.”
The agreement comes just a few days after Deutsche Bank sold its first portfolio of equity derivatives, another key step to exit equities trading and get the associated assets off its balance sheet. The bank has said it will provide more details when it publishes third-quarter results on October 30.
When the two firms first discussed the deal, Deutsche Bank’s prime brokerage business was set to move about €150bn ($165bn) of balances, people familiar with the matter have said. Yet clients put off by the uncertainty of the deal headed for the exit, pulling about $1bn of funds per day, the people said at the time.
Prime-brokerage divisions cater specifically to hedge funds, lending them cash and securities and executing their trades, and the relationships can be vital for investment banks.
The prime business generated about $18.3bn in fees across the industry in 2018, about the same as revenue from trading corporate debt and currencies combined, data from Coalition Development Ltd show.
The deal will give BNP the technology it needs to improve trading with asset managers and hedge funds specialising in quantitative strategies, Olivier Osty, global head of markets at the Paris-based bank, said in an interview. Executives at the French lender had been planning to develop a platform themselves but had estimated it would take three to four years, he said.
“The electronic platform is dedicated to managing all the big quant funds that we’re missing in our franchise,” Osty said. “So this is the opportunity to bring to BNP Paribas a product that was missing and that could allow us to grow.”
Quantitative hedge funds, such as Winton Capital Management and AQR Capital Management, use computer algorithms to evaluate risk, pricing and timing in financial markets. Investors, fed up with years of lacklustre returns by other kinds of managers, have flocked to the industry.
Assets under management at so-called quants have surged 88% since 2010 to $951bn, compared with a 53% gain for other funds, according to data from Hedge Fund Research.
Deutsche Bank, which became a force on Wall Street in the wake of the financial crisis, has struggled to keep hedge-fund clients in recent years as it lurched from one problem to another.
US rivals JPMorgan Chase & Co, Morgan Stanley and Goldman Sachs Group Inc are the top three firms in the business, while Deutsche Bank wasn’t among the top seven prime brokers in 2018, Coalition data show.
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